The Randomness of Your Reality

A popular business book may offer some important lessons for the electrical market.

Have you ever looked back at some of the flash points in the history of your company and realized they were not the product of your careful strategic planning but were instead low-probability random events that somehow became major turning points? If so, you may have come in contact with one of the “black swans” popularized in the business book by that name written by Nassim Nicholas Taleb.

The title of the book, The Black Swan: The Impact of the Highly Improbable, comes from the ancient belief that all swans were white, a theory disproved in the 17th century by the discovery of black swans in Australia. According to www.wikipedia.com, that discovery came to represent the existence of the improbable, and the fact that just because something is outside our realm of experience doesn't mean it can never happen. Taleb, a one-time Wall Street trader, uses the lessons of the black swan in his book to support his thesis that business professionals are blind to randomness, particularly the events that represent large deviations from what they consider the norm. He uses the example of how the Long Term Capital Management (LTCM) hedge fund blew up after its founders “allowed themselves to take a monstrous amount of risk because their models ruled out the possibility of large deviations.”

Taleb scoffs at the economists who construct forecasts based solely on the market facts and track records of the past and don't factor in unexpected rare events. He says black swans can be good (the development of the Internet) or bad (the 9/11 attacks), but are always totally unexpected. In the past 18 months, I think you will agree that the global economy has seen several black swans — the housing market implosion and the credit freeze are top of mind.

Taleb says certain markets are more prone to black swans — both good and bad — and uses the venture capital market as one example. He says an entrepreneur with a radically useful idea who is funded by venture capital can change the world — even though hundreds if not thousands of other start-ups burn through their funds and flame out.

Black swans occasionally visit the electrical market. Often they come in the form of a technological tool that transforms the business world as a whole, as fax machines did in their era and the Web has done over the past 15 years. Every great while, they come in the form of a new electrical product. Think of how the simple wire connector changed how electricians join together wires, or how LEDs will one day revolutionize how we light buildings.

I think you can use the concept of the black swan as a training exercise for your company to stretch its horizons and factor in the potential of the improbable. Ask yourself and your management team the following questions:

How could your company become the biggest distributor in the world?

If money was no object and you could hire anyone in the world, who would be on your dream team?

If you were starting your company from scratch and could hand-pick your portfolio of product lines and key customer accounts, which companies would you want to do business with?

If you had unlimited financial resources with which to expand your company, which competitors would you acquire? Where would you open new branches?

Your answers to these questions may all seem far-fetched. None may really offer a realistic opportunity to grow your company. But by opening your mind to consider the possibility of the improbable, one of the answers to these questions may help you see the next black swan when it comes to visit.

How to Learn More About Black Swans

Published in 2007, Nassim Nicholas Taleb's The Black Swan: The Impact of the Highly Improbable, is available in bookstores and can be purchased at www.amazon.com. You can also learn more about Taleb's theories on his website, www.fooledbyrandomness.com and in an article in The New York Times entitled “Risk Mismanagment” available at www.nytimes.com.